The $33b price that Chevron paid is equivalent to a $65 share price for Anadarko, or at least it was premarket, before Chevron stock dropped $6 on the news.
In any case, WOW -- that's a heavy premium, even for one of the best asset portfolios in the energy space, which Anadarko undoubtedly is.
But quickly, let’s try to make some immediate takeaways from the Chevron deal, because big deals like this tend to cause a lot of buzz and obvious questions from investors:
1- Did Chevron overpay? In my mind, COMPLETELY, even though reports are now surfacing that Occidental (OXY) actually offered more. The Anadarko asset base is unassailable and always has been, with prime acreage in the Delaware basin and the DJ basin, emerging shale value in the Powder River and sector leading strength in the Gulf of Mexico. But even at $45 a share, the forward P/E of the company was in the high 20’s at best, and relies, as all the shale players do, on a very robust oil price to generate cash – something it still at over $50 a barrel had been unable to do, despite 4 years of adjustments to the last oil price collapse. In fact, Anadarko's latest shareholder presentation was one I keyed on for the previous articles I wrote for Seeking Alpha. Two slides in particular had annoyed me, both showing the continued inability to generate free cash flow at current oil prices despite the quality of their asset base, and their very optimistic projections of breakeven costs that they claimed were destined to continue to significantly decrease in the next two years:
2- Does this mark a new rush of Majors towards independent shale players? Well, this was the kind of buyout I expected in 2015, not today – The other stocks in the sector are all reaping a whirlwind benefit today with the speculation of who might be next. I’ll say that I’ve never been much good at the Svengali trick of finding takeover targets and buying them, and in terms of the independents out there who I considered incredibly undervalued, I wasn’t particularly hot on Anadarko. What I WILL say is that the independents that are doing particularly well today are those that I have isolated as the better ones, with equally quality assets but also capable of generating free cash flow at $50 oil, including EOG Resources (EOG), Continental Resources (CLR) and Concho Resources (CXO).
So – what are the takeaways?
First, we must note the trend of dominance that is continuing for Majors in shale. I've made a big deal out of that as a long-haul trend to my subscribers, and a reason to be very picky about our shale investments in independent E+P's. Today,the stock prices are working in an opposite direction, as all the independents rally and the majors lag – but I wouldn’t put my money in that price trend lasting. The question is: Is there going to be a re-rating of independent shale E+P's based upon this new, ‘intrinsic’ buyout premium that Chevron has implied through it's deal with Anadarko? I don’t know. But, in my mind, the long-haul move is not to speculate on that, and instead to continue to concentrate on Majors and FCF positive independents in the space. Don't be sucked into playing the Svengali game.
Finally, should this unexpected buy from Chevron change the strategy we have in Onshore shale assets. I don’t think so, even though Chevron shares are down big today. The majors are still better equipped to make shale a long-term cash flow machine at all price levels for oil, making them the better bets long term. Plus, the beating that Chevron is taking for this premium buyout is showing us that overpaying for shale assets today is a punishable offense – and therefore unlikely to be followed by other majors.
So, why did Chevron do it? Were they made nervous by the 165% increase in recoverable assets that Exxon (XOM) showed at their latest quarterly report and willing to overpay to buy recoverable barrels in their already extensive shale assets as opposed to developing them? Who knows.
But in all cases, I think this deal is a one-off, and unlikely to spark a trend of shale independents being bought up by Majors. And chasing independents today in search of the next one to be bought is a fool's task.
NOW – watch BP buy Pioneer Natural Resources tomorrow and make me look completely silly. I told you, I’m no Svengali.
Disclosure: I am/we are long EOG, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.